Under Kansas destination-based sourcing, how are a contractor's materials and labor taxed, and what about out-of-state jobs?

Plain-English summary

A glass-tinting contractor installs adhesive film on glass at new construction sites in both Kansas and Missouri, buying the film from an out-of-state vendor that ships it to the contractor's Kansas location and does not collect tax. The contractor asked how Kansas's destination-based sourcing rules apply.

The Department laid out the framework:

• Materials — contractor is the consumer. Under Kansas law a contractor is treated as the consumer of the materials it installs (not a reseller). Under destination sourcing, tax applies where the purchaser receives the product — here, the contractor's business location. So Kansas state and local use tax at the business-location rate applies to the film. Because the out-of-state vendor did not collect it, the contractor should self-accrue Kansas use tax and remit it on the Consumers' Compensating Use Tax return (Form CT-10U).
• Labor — sourced to the job site. When the contractor performs taxable labor services, the sales tax at the location where the film is installed applies. The tax base is the total charge to the customer minus the tax-paid materials cost. Work in more than one jurisdiction is reported on Form ST-36; work only in the home jurisdiction can use Form ST-16.
• Out-of-state jobs. If materials are earmarked at the time of ordering for a specific out-of-state project and are not kept in inventory, then under K.S.A. 79-3702(e) those materials are not subject to Kansas use tax — Missouri's tax law governs the Missouri projects.

What this means for you

Contractors and installers (glass, film, finishes)

Treat yourself as the consumer of the materials you install. If your supplier doesn't charge Kansas tax, self-accrue use tax at your business-location rate on Form CT-10U. Charge sales tax on your taxable labor at the installation site's rate, using a base of total charge minus the tax-paid materials.

Businesses working across the Kansas–Missouri line

Materials you order specifically for a named out-of-state job and keep out of inventory can avoid Kansas use tax under K.S.A. 79-3702(e); that state's tax then applies. Materials pulled from general inventory don't get that treatment.

Bookkeepers handling multi-jurisdiction filing

Use Form ST-36 when reporting taxable services in more than one Kansas jurisdiction; Form ST-16 is for a single home jurisdiction.

Common questions

Q: Do I charge my customer sales tax on the materials?
A: No — as a contractor you are the consumer of the materials. You pay (or self-accrue) tax on them yourself, at your business-location rate, and instead charge sales tax on your taxable labor.

Q: My out-of-state vendor didn't collect Kansas tax. What do I do?
A: Self-accrue Kansas state and local use tax at your business-location rate and remit it on Form CT-10U.

Q: How is my labor charge taxed?
A: Taxable labor is sourced to where the work is installed, and the taxable base is the total charge minus your tax-paid materials cost.

Q: What about materials I buy just for a Missouri job?
A: If they're earmarked for that specific out-of-state project when ordered and not kept in inventory, K.S.A. 79-3702(e) keeps them out of Kansas use tax; Missouri law then applies.

Q: Does this ruling apply to my business?
A: A Kansas private letter ruling addresses only the requesting taxpayer's facts and cannot be relied on as precedent by others, though it shows how the Department applies destination sourcing to contractors.

Citations and references

• K.S.A. 79-3702(e) — provides that materials earmarked at ordering for a specific out-of-state project and not kept in inventory are not subject to Kansas use tax. The Department applied it to the contractor's Missouri-project materials.
• Forms and guidance referenced: Consumers' Compensating Use Tax return CT-10U; retailers' sales tax returns ST-36 (multiple jurisdictions) and ST-16 (single jurisdiction); Notices 03-01 and 03-02 explaining the new destination-based sourcing rules; and Publication 1510 (general Kansas sales tax guidance).
• K.A.R. 92-19-59 — the regulation authorizing Kansas private letter rulings.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2003-048

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

October 24, 2003

XXXX
XXXX
XXXX

Re: Private Letter Ruling

Dear XXXX:

You indicate that your business, XXXX, performs work as a contractor in tinting glass primarily at new residential and commercial construction sites. This work involves installing adhesive film on the glass. Your business generally purchases the adhesive film on an as needed basis from an out-of-state vendor who ships the adhesive film to your business location at XXXX, Kansas. The out-of-state vendor does not collect sales or use tax on such sales. Your business performs glass tinting both in Kansas and Missouri. You have requested guidance on how the Kansas sales tax laws apply to your business, particularly with the new destination-based sourcing rules.

Under the new destination-based sourcing rules, the sales tax in effect at the location where the purchaser receives the product applies. Under Kansas law, the contractor is deemed to be the consumer of the materials installed at the construction project site. Because XXXX is the contractor and receives the adhesive film materials at its business location in XXXX, XXXX will be considered the purchaser and consumer of those items. The Kansas state and local sales or use tax in effect at the XXXX business location will apply to those material purchases. If XXXX's vendor is not collecting Kansas sales or use tax on the sales of adhesive film to XXXX, then XXXX should self-accrue Kansas state and local use tax (which would be the same rate as the Kansas state and local sales tax) in effect at the XXXX business location on the purchased materials. XXXX should report and remit the accrued use tax to the department, using the Consumers Compensating Use Tax form CT-10U (form and instructions downloadable from the department's website at www.ksrevenue.org).

When XXXX performs taxable labor services (such as glass tinting work at a commercial remodeling project), the sales tax in effect at the location where the adhesive film is installed will apply to those services. The sales tax base for the taxable labor services would be the difference between the total amount charged to the customer less the tax-paid materials costs. Assuming that XXXX would be performing taxable services at different locations outside of [its business location taxing jurisdiction], XXXX should report and remit the sales tax on its taxable services using form ST-36 (for reporting sales in more than one taxing jurisdiction). If XXXX performs taxable services during the reporting period only in XXXX, the taxing jurisdiction of its business location, then form ST-16 (for reporting sales only to the taxing jurisdiction in which the business is located) can be used. These forms, and instructions, can be downloaded from the department's website, www.ksrevenue.org. General guidance on Kansas sales tax laws is also available in Publication 1510, also downloadable from the department's website.

If XXXX orders materials from an out-of-state vendor, which are shipped or delivered to XXXX and are earmarked at the time of ordering for use in a specific out-of-state project and not kept in inventory at the business premises, then pursuant to K.S.A. 79-3702(e), such materials used at an out-of-state project (such as in Missouri) would not be subject to Kansas use tax. Missouri sales tax laws apply to projects done in Missouri.

This is a private letter ruling pursuant to K.A.R. 92-19-59, based on the representations you have made. To the extent those representations are incomplete or inaccurate, this ruling is void. This ruling will be revoked by operation of law without further department action if there is a change in the controlling statutes, administrative regulations, revenue rulings or case law that materially effects this determination.

Enclosed please find copies of Notices 03-01 and 03-02 explaining the new destination-based sourcing rules and forms ST-36 and CT-10U. If you have additional questions, please let me know.

Very truly yours,

Richard L. Cram

Date Composed: 10/24/2003 Date Modified: 10/24/2003

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